Fuels

COVERAGE AREA and macrothesis

Last year, newly price-responsive U.S. gasoline demand saved the day for policymakers and oil markets alike. A larger gasoline pool created room for the EPA to ramp up its Renewable Fuel Standard (RFS) volume obligations despite the “blend wall” and, globally, gasoline comprised roughly two-thirds of global petroleum and liquids growth. This year, however, we anticipate that U.S. gasoline consumption could plateau due to cumulative fleet fuel economy gains from Obama-era standards and an opposite (if not quite equal) discretionary U.S. consumption response to rising pump prices. We expect President Trump to revise the Obama Administration’s fuel economy targets for Model Years 2022 – 2025, but we see bigger market impacts from changes to alternative fuels and vehicles policies. We think EPA Administrator Scott Pruitt is likely to lower 2018 RFS blending percentages and we now give fair (rather than near-zero) odds that the EPA could move the RFS point of obligation. Supply-wise, tight historical (2006-2015) correlations between refining margins and global spare refining capacity imply that capacity additions may not adversely affect margins before 2018 or 2019. Although a border tax adjustment could adversely impact refiners, we see low (<25%) odds for such a move.